Log charts are useful for identifying long-term trends and measuring relative price changes, but they can be confusing when it comes to more recent drawdowns.
This is obvious to many traders, but it appears that some analysts, usually permabulls, are using log charts to support their bullish thesis without complementing them with drawdown charts. Here is an example for Nike (NKE):
The linear top chart clearly displays the current drawdown of 57.3%. However, the log chart can be visually misleading because it gives the impression of consolidation. This is a reason why drawdown charts are useful along with long-term log charts.
Here is the long-term chart of the S&P 500 index:
On the log chart, the severity of the pandemic drop of 34% is not as pronounced as in the linear chart. Here, it is also useful to include drawdown charts. Drawdowns cause uncle points to investors.
Another interesting fact is that log charts better depict the severity of adverse events in the distant past, such as the 1987 crash, which is not even clearly visible on the linear chart. Regardless, drawdown charts are useful and must complement any long-term charts, whether linear or log.
I use both linear and log charts because they are useful for different purposes.
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Specific disclaimer: This report includes charts that may reference price levels. If market conditions change the price levels or any analysis based on them, we may not update the charts. All charts in this report are for informational purposes only. See the disclaimer for more information.
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Charting and backtesting program: Amibroker. Data provider: Norgate Data
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